For the first time in years, analysts expect a flurry of securities issues by major banks aimed at shoring up capital levels.
Awash in capital at mid-decade, some leading banks now find themselves nearing minimum levels after deploying funds in rounds of acquisitions and aggressive stock repurchase programs.
Among the banks whose capital ratios have slipped substantially are Fleet Financial Group Inc., Wells Fargo & Co., and J.P. Morgan & Co.
"Some bigger banks have significantly traded off their strong capital ratios," said Joseph J. Labriola, head of corporate bond research at PaineWebber Inc.
"Look for buyback programs to be tempered during 1998, and for more banks looking to access the capital markets," he said.
Bank capital ratios, which cushion banks against cyclical adversity, remain above minimum regulatory requirements. But they have been on the wane for four years.
Regulators consider a bank to be "well capitalized" if Tier 1 capital- which includes equity or trust-preferred securities-is at least 4% of risk- adjusted assets. The standard for total capital - which can include subordinated debt-is 8%. There is no regulatory standard for tangible common equity-common stock minus intangibles-but examiners step up their scrutiny when the level falls below 5%.
Market experts say the steady decline could spur many financial institutions to begin issuing more debt or trust-preferred securities to replenish their Tier 1 capital and total capital.
Many banks are asking shareholders at their upcoming annual meetings for larger than usual authorizations of new common stock, which could be issued for capital purposes and to fuel acquisitions. (See article, page 28.)
Four years ago, the U.S. banking system was by far the best capitalized system in the world, after an unprecedented rebuilding effort sparked by the credit problems of the late 1980s.
U.S. banks "had the highest ratios of any G7 (industrialized) country. And it still is the best," said bank bond analyst Katharine Rossow of Chase Securities Inc. "But instead of going up, the trend has gone in the other direction."
In short, the days of banks overflowing with capital appear to be ending.
Total capital, which supports lending and deposit activities, has slipped significantly for several large banks, according to figures from PaineWebber and Sheshunoff Information Services, a sister company of American Banker.
For example, total capital at Fleet Financial Group, an active acquirer, eroded to 10.90% at the end of 1997, from 14.28% in 1994. Wells Fargo & Co.'s total capital fell to 11.90% last year, from 14.13% in 1994. And J.P. Morgan & Co.'s level dropped to 11.90%, from 14.82%, over the same period.
Fleet's tier one capital fell to 7.30% at the end of 1997 from 9.97% in 1994; Wells Fargo's tier capital declined to 7.60% from 9.14% in the same period and J.P. Morgan's drifted down to 7.90% from 9.41%.
Indeed, on March 4, Fleet issued $250 million in 10-year subordinated debt.
Bank bond analyst Matthew H. Burnell of Merrill Lynch & Co. expects more issuance, particularly of trust-preferred securities, which have become the favored instrument of many banks when it comes to replenishing Tier 1 capital.
Proceeds of trust-preferred securities used by banks for Tier 1 are "considered to be lower quality capital than common equity," Mr. Burnell pointed out, but the current problem-free operating environment has largely submerged such concerns.
"If you believe that cyclicality of the banking environment is a thing of the past, then you shouldn't worry about that," Mr. Burnell said. "We are not quite so sanguine about that.
"We are not predicting the collapse of the banking system," he emphasized, "but we are not taking cyclicality out of the equation."
Ms. Rossow similarly noted that issuance of debt or hybrid securities like trust-preferreds is no cure-all for banks that now may be close to minimal regulatory capital levels.
In fact, Ms. Rossow noted that the most severe form of capital erosion in some banks is in their tangible common equity ratio.
Ratings agencies are tending to discount the value of Tier 1 capital, "because it contains too many bells and whistles," Ms. Rossow said. "So many forms of capital have been allowed to count that it no longer is a simple ratio," she said.
"Tangible common is the strictest way of evaluating a bank's capital," she said, "and that is what the rating agency's are focusing on."
Those banks whose tangible common equity has drifted closer to the minimum requirement include Bankers Trust New York Corp., down to 4.40% yearend 1997 from 6.28% in 1993; J.P. Morgan, down to 4.10% in 1997 from 7% ; and Wells Fargo & Co., down to 3.50%, from 6.51%
Such significant declines in tangible common equity mean the potential for negative ratings has increased, Ms. Rossow said.
In fact, Star Banc Corp., Cincinnati, and its subsidiary Star Bank N.A. were placed on credit watch with negative implications by Standard & Poor's Corp. last month, because of deteriorating tangible common equity ratios.
The deterioration, S&P said in a press release, was traceable to prior acquisitions and the company's intention to buy 53 Ohio branch offices from Banc One Corp.
After meeting with the company, S&P subsequently reconfirmed the bank's ratings.